OTTAWA, Sept 22 (Reuters) - Canadian retail sales volumes declined in July, pointing to a slower pace of growth at the start of the third quarter, though a pick-up in inflation in August still left the central bank with room to raise interest rates again.

A moderation in growth heading into the third quarter is expected after a strong first half of the year made Canada a Group of Seven leader.

That solid performance prompted the Bank of Canada to raise interest rates twice so far in 2017. Economists are trying to gauge whether the central bank will raise rates once more by the ecend of the year or wait until 2018 to tighten.

Data released on Friday showed overall retail sales rose 0.4 percent. While that topped expectations, economists focused on a 0.2 percent decline in volumes, which suggested economic growth was likely flat in July.

Economists said Friday’s mixed data was not definitive either way and suggested the bank could take its time raising rates if it wants to.

“The bank is going to be looking at the retail data as maybe an indication that they don’t need to go on an exceptionally quick path toward normalization, but it’s not so weak a print that it’s going to preclude further tightening this year,” said Andrew Kelvin, senior rates strategist at TD Securities.

The annual inflation rate rose to 1.4 percent in August from 1.2 percent in July, slightly short of forecasts for 1.5 percent.

Two out of three of the central bank’s core measures also rose, suggesting inflation was stabilizing after recent weakness, economists said.

“It still implies the bank will at some point tighten further,” said Paul Farley, assistant chief economist at Royal Bank of Canada.

“However, the inflation is still below mid-range target, and does give them scope to undertake the tightening very gradually.”

The Canadian dollar pared gains against the greenback following the data.

Market odds of an increase in October declined to 37.7 percent from 41.6 percent just before the data, though traders still see 83 percent odds of a hike in December.

Higher gasoline prices helped drive total inflation higher, as did more expensive shelter and food.

The Bank of Canada’s CPI common measure rose to 1.5 percent, while CPI trim edged up to 1.4 percent. CPI median held steady at 1.7 percent.